Galliard Homes’ Capital Towers residential development in Bow, E15, could be stalled by high construction costs.
The 191-flat development is barely breaking even and “unviable” at its current appraisal, which would return an “unacceptable” 1.3% profit to the company.
As a result Galliard has applied to the London Legacy Development Corporation to cancel a £7.2m affordable housing payment under section 106BA.
This would boost its profit margin to 14.1%, which it said in its application was still “barely sufficient”. That figure is below the 20% margin anticipated when the payments and consent were agreed in 2012 and Galliard paid an initial £200,000 affordable homes contribution.
The company also highlighted to the LLDC the dynamics that have affected the London residential market since 2012, including increased stamp duty, “global economic uncertainty pertaining to a second dip or crash following instability in the Chinese economy”, the mayoral election, EU referendum and “a resurgence of development outside of London, which… offers better yields than London”.
Tender prices for London residential construction have risen by more than 21.5% since 2012, according to development consultancy Arcadis. However, residential values have increased in Newham by 54.4%, according to the Land Registry.
In 2011, the estimated development cost for Capital Towers was £35.8m, but it now stands at £44.2m – a 23.5% increase.
The payments, which were predicated on the end value of the scheme exceeding £63.4m, have become due as it is now booked at £71.7m.
However, Galliard argues that the payments should be “based on the net uplift in value after all revenues and costs have been taken into consideration” and that “no reasonable authority would have considered a mechanism that sought to capture only increases in gross development value in a market where substantial build cost inflation would reduce an applicant’s profit to 1%”.
The LLDC believes only the total end value is relevant.
The deadline for a decision on the appeal is 4 July, and the development is scheduled to complete in mid-2017.
A Galliard spokesman said: “The correct and proper payment will be made when due. The monetary contribution is always based on viability and this particular viability has been materially affected by sharply increased construction costs during the build programme.”
Galliard’s situation will bring into focus the struggles of other central London residential developers to turn a profit.
Simon Rawlinson, head of strategic research and insight at Arcadis, said: “Negotiations in connection with rising construction costs have been clogging up the market for some time, and we are seeing developers unable to agree costs on construction, which in some cases go back to the drawing board.
“Rising costs are obviously affecting viability. For developers on a pre-sale model who locked in values before costs rose rapidly in 2013, inflation could easily have eroded expected margins.”
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